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Does Your Portfolio Have Enough Active Share Exposure?

By U.S. News & World Report

For the last decade, financial markets have wandered through unchartered territories. A recession, tightly controlled monetary policy, unstable geopolitical conditions and volatile commodity prices all took aim at the market’s ascension. Despite some temporary drawdowns, the Standard & Poor’s 500 index has traversed a consistent bull run since February 2009.

This continuing upward trend enticed many investors into passive management strategies, or those that seek to mimic the overall market. This exposure, while perhaps advantageous in a continuous bull market, is inherently problematic because it leaves a portfolio with limited potential to outperform its benchmark. And it provides no protection should the market slide into bear territory. With the complexity of today’s markets, now more than ever, it is relevant to be in an active management strategy.

Passive investments, also known as index funds, come in many shapes and sizes. Between exchange-traded funds and index funds, investors poured more than $500 billion dollars into these passive investment vehicles in 2016, according to Morningstar. As a result, many portfolios are weighted toward passive investment strategies.

[See: 7 Ways to Trade Volatility With ETFs and ETNs.]

But with almost a decade of an upward trajectory on the books, investors must also protect themselves for a possible reversal of this trend. This will most certainly happen at some point. Active share management, which measures the percentage of a portfolio’s holdings that differ from its benchmark, should play an important role in portfolio exposure if for this reason only. Reducing a portfolio’s correlation to the benchmarks provides downside protection while also uncapping the potential for growth.

The case for high active share funds, or funds that invest 80 percent or more of their assets differently from their benchmark, is two-fold. Firstly, a significant amount of academic research concludes that high active share funds outperform. A 2013 study by Antti Petajisto determined that, from 1999 to 2009, high active share funds outperformed both their benchmarks and respective lower-active share funds. And yet, a December 2016 study by Martijn Cremers revealed that out of all assets invested in U.S. equity mutual funds, only 30 percent are in funds with high active share strategies; and, only around 10 percent of assets are in the highest conviction funds, or funds with an active share of 90 percent or higher.

Secondly, high active share funds have the potential to offer similar diversification benefits that are typically associated with passive strategies. The goal of diversification, or spreading risk exposure across securities, is reduced portfolio volatility. Despite some misconceptions, most diversification benefits are realized after relatively few securities are added to a portfolio. In fact, diversification benefits begin to diminish after only 30 stocks in a portfolio. High active share funds provide concentrated diversification benefits that passive investments cannot.

[See: 9 ETFs to Buy When the Market Tanks.]

Data shows that the practice of adding too many securities for diversification purposes actually diminishes risk reduction. A portfolio of only five securities, for example, could be expected to have an annualized volatility of 30 percent or higher. Increasing the holdings to 30 securities, which is within the range of many high active strategies, would result in an expected portfolio volatility around 22 percent. Increasing that to 100 or more holdings would result in a minimal reduction in expected volatility at only approximately 21 percent. In this scenario, the strategy is more likely to track its benchmark and less likely to deliver returns that outperform that benchmark, capping potential growth.

When reviewing these categorized funds, it is important for investors to monitor their manager’s active share. An increasing percentage of mutual fund assets are in strategies with low active share, despite their appearance as active share strategies. These funds charge active management fees for a strategy that simply shadows its benchmark, a practice known as closet indexing. Any portfolio reallocation into active mutual funds must include an evaluation of a fund’s strategy to ensure that it does in fact fall into the higher active share category, so that the portfolio can reap the most benefits from the strategy.

[See: 10 Ways to Invest in Driverless Cars.]

U.S. equity mutual funds have seen a trending decline in assets in actively managed funds. This downward trend, propelled by assets flocking to passive investment strategies, has put many portfolios at a disadvantage for future growth. Active strategies, particularly those with higher-active share, should not be dismissed, and should be reevaluated for the role they play within a portfolio’s allocation. Now is the time to reevaluate the market’s future and how active strategies fit into that picture.

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Does Your Portfolio Have Enough Active Share Exposure? originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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